Gold is ending the week under pressure. But what we find more interesting is what it hasn’t done.
The macro environment is becoming increasingly hostile for gold again.
The Fed raised rates by 25 basis points last week, and since then the market has moved toward pricing in another hike. The dollar strengthened, while the 10-year U.S. Treasury yield climbed above 5.2%, around levels we haven’t seen in roughly two decades.
That is almost the perfect combination for putting pressure on gold.
Gold pays no interest. So when Treasury yields rise, the opportunity cost of holding it increases. A stronger dollar adds another headwind. Add a hawkish Fed to the mix, and there is nothing particularly surprising about gold ending the week lower.
What caught our attention is the size of the reaction.
Gold lost roughly 1.7% over the week, yet it continued to hold around $4,300 instead of experiencing the kind of selloff that such a significant repricing of rates might have triggered in the past.
We think that makes this a pretty good stress test.
Bull markets are usually judged by how quickly they rise. We also like to watch how they behave when the environment turns against them.
If gold only performs when yields are falling, the dollar is weakening and the Fed is easing monetary policy, the story is relatively simple. But when it remains resilient while those forces temporarily move in the opposite direction, it may tell us that something else is supporting the market underneath.
If Treasury yields continue to rise and expectations for another rate hike strengthen, gold could remain under pressure. Next week’s U.S. inflation and labor-market data will matter because they could quickly shift expectations for the path of rates again.
But there is a bigger picture here.
Gold has been supported in recent years by forces that extend well beyond the next Fed meeting: central-bank buying, geopolitical uncertainty, concerns around government debt and deficits, and a broader push by some investors and institutions to diversify reserves and portfolios.
Those forces do not disappear simply because the 10-year Treasury yield moves above 5%.
And that is why we are watching how gold absorbs bad news, not just whether it finishes a particular week higher or lower.
A stronger dollar, rising yields and renewed expectations of another rate hike are exactly the kind of environment that should test conviction in gold.
The test is underway.
And gold is still holding around $4,300.
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